Where Else Are You Going to Go?

Yves Smith returned from book-writing land to catch up on the Andrew Hall story, which is one that I pretty much decided to ignore from the beginning. Hall is the Citigroup trader who, according to his compensation agreement, was due a $100 million bonus. The bonus was so big because Hall and his team were due 30% of the profits from their trades, which is even more than typical hedge fund fees. (This tradition of particular trading groups negotiating a share of their profits dates back at least to Salomon in its heyday; AIG Financial Products also had this type of deal.)
But Smith focused on one element that got me thinking. Hall’s division, Phibro, was bought by Occidental Petroleum. “Oxy paid $250 million, the current value of Phibro’s trading positions. There was NO premium, zero, zip, nada, for the earning potential of the business. Zero. Oxy bought the business for its liquidation value.” Smith infers that no one was willing to pay more because the success of Phibro depended on its being part of Citigroup and benefiting from Citi’s low cost of funding; in other words, the massive profitability of Phibro was in part due to an accounting error — not charging it an appropriate cost of capital given the risk it was taking.
This made me think of something else, though. The typical excuse for paying traders enormous amounts of money is that if you don’t, they will leave for somewhere else. During the boom, it was certainly true that they would have left. (Whether anyone would have missed them is another question — it seems to me that some of the reasons to be skeptical of mutual fund managers apply equally to proprietary traders.) But after the crisis, the options for someone hoping to leave a major investment bank must have declined.
I’ve written so many times that reduced competition has helped the survivors increase market share and margins, but I never realized the other consequence: it gives them more bargaining power relative to their employees. There are fewer banks to go to; some of them (Citi, Bank of America) are in no shape to be paying top dollar; and while some hedge funds are doing just fine, their cost of funds must have gone up relative to the big banks in the current environment. With less competition for talent, compensation should go down, at least a little.
So why is Goldman reportedly on track to pay record or near-record bonuses this year? I imagine they would say something about how, in order to maximize long-run firm value, they shouldn’t take this opportunity to screw their employees. But if I were a shareholder, I would think a small amount of employee-screwing would be in order. This is a company that claims to live and die by the free market, after all.By James Kwak

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Andrew Hall is known as "The God Of Oil" by some floor traders. When he was to be paid a $100 million bonus, the Great Recession had just begun and anger toward banks prompted officials to reign in corporate bonuses from those which took bailout funds. Since Citigroup owned the Phibro Group, the subsidy that once stood on its own before Citi bought and later sold the organization to Occidental Petroleum, Hall was able to keep his $98 million bonus from 2008 -- but not the $100 million bonus from 2009.

How does a renowned oil trader who bets on rising prices make money when crude plunges 18 per cent in a month? By betting on the U.S. dollar at the same time.
Andrew J. Hall, revered for anticipating major swings in the market, posted a 1 per cent gain in his commodity hedge fund in November, according to people familiar with the matter. Hall, who is leaving his longtime post as chief executive officer of Phibro LLC, the century-old commodities trading house now owned by Occidental Petroleum Corp., sees oil falling further as he focuses on his private fund.

Oil prices have almost bottomed out and “some recovery” is likely by the second half of the year as demand picks up, commodity hedge fund manager Andrew J. Hall told investors.
Crude could trade in the US$40-a-barrel range in 2015, close to “an absolute price floor,” the head of Astenbeck Capital Management wrote in a Jan. 2 letter obtained by Bloomberg News. A significant amount of U.S. and Canadian production can’t cover the cash costs of operating at that price, he said.